SINGAPORE/NEW YORK — The United States and China slapped tit-for-tat duties on $34 billion worth of each other’s imports on Friday, with Beijing accusing Washington of triggering the “largest-scale trade war” as the world’s two biggest economies sharply escalated their conflict.

“The numbers today that have been implemented by the U.S. and the Chinese, by themselves are not that large and it was expected. The market had a chance to discount today’s actions. The question for the market is how far does this go.”

“This market is now going to wait for the next phase and hope there’s a resumption in negotiations.”

“The market has decided which areas are clear and which are more vulnerable. There are pockets that remain vulnerable. Many of the big industrial names and automobiles. This is broader than just China. It also includes the EU.”

“The market is waiting to see what is next. They’ll discount what they know. The question is how protracted and enduring this can be. You can say small and mid-cap stocks are a pocket of safety but at some point they become overvalued.”

“You’ll look for more U.S. focused companies for the time being. You’re going to focus on what you know and what you don’t know. But you have to look at valuation.”

“We’ve see allocations toward the treasury market. That’s made utilities attractive again. REITs have found an audience after being in the doldrums and even telecommunications. At this stage you want dividends and quality. You want to make sure you’re buffered. There’s also a case to be made for cash allocations to sit and wait for this to unfold. If there’s a resumption of negotiations we should see the market applaud. It could be a very long summer.”

“What happens is that uncertainty envelops decision making. The tax cuts had CFOs and CEOs do share buybacks, mergers and acquisitions, sweeten dividends and spend more on capex but the uncertainty tends to freeze any decisions.”

“Even at the margin a pause in decision making could lead to a negative feedback loop if there’s a protracted trade war. That is the worry, where this expands and endures and leads to a summer of uncertainty.”

STEVEN ENGLANDER, HEAD OF G10 FX, AND NORTH AMERICAN MACRO STRATEGY, STANDARD CHARTERED, NEW YORK:

“This was very well priced in. If anything, China is trying to signal that they want to take the high road on this. In a sense, they are looking for opportunities to negotiate rather than be confrontational. Doesn’t mean they won’t respond, but the tone that they are taking is this is more in sadness than in anger that we are responding.

“Maybe there is some balance coming back to the market. There is an equivalence between a tariff and an FX move. For instance, if you think of it, when the dollar goes from $1.21 to $1.10 or $1.09 that is a 10 percent dollar appreciation. It is no fun, and some jobs move abroad, but companies deal with it.

“This tearing out of the hair over a relatively modest tariff across a modest set of goods and it has been clear it is supposed to be a negotiating tactic, I think some perspective is returning to the market. They can be rolled back overnight.”

“Last night’s developments raised the concern around the tariff war, that’s something investors will key in on over the next few weeks. There’s not an easy solution for that, the U.S. and China have had several discussions since May and they haven’t really gotten anywhere. Last night’s events increased the uncertainty, and likely more volatility in the market.”

“The tariffs were not a secret to anybody … The hope is that they would sit down more thoughtfully at the bargaining table and work out the differences.”

“The major concern is the supply chain. So many little parts for almost everything are manufactured in China, and there can be a real hold-up in manufacturing because of these tariffs … It is all a balancing act. For every company hurt, there’s a company that’s being helped. So this isn’t negative for everyone by any means.

“I am surprised the markets in general haven’t reacted more to this issue (of supply chain). Companies will be impacted. There will be lower earnings and revenue expectations for the rest of the year given these tariffs. What we know is that this is just the first salvo.

“There are so many moving parts in the supply chain … It’s easy to say every motorcycle sold in Europe is going to be $2,000 costlier to Europeans. But others are much more opaque.

“There’s a reason why small companies, and to a lesser extend medium-sized companies, have benefited in the market since March. They have less, or no, exposure overseas … We have a small-cap strategy, and we’ve been tilting more to small- and mid-caps even in our core strategy.”

“Certain sectors will feel the pinch more than others. So I guess the real question is how long do we stay in the trade war. Trump last night, I think he talked about China facing $400 billion worth of (goods subject to) tariffs. That’s quite hefty. If we got to that point, all bets are off for any continuation of the bull market.”

WANG JUN, CHIEF ECONOMIST AT ZHONGYUAN BANK, BEIJING:

“A trade war has started. Impact on China’s economy from U.S. tariffs on $34-$50 billion Chinese goods should be limited.

“If they impose tariffs on $250 billion worth of Chinese goods, it should be seen as a full-blown trade war and the impact will be much bigger, not just on the two economies but on the global economy and supply chains.”

“China will have no choice but use non-trade barriers, such as retractions on U.S. investment in China and their profits, or double the size of tariffs imposed on U.S. goods.

“They showed strong disagreement to our values and there could be endless conflicts and frictions, this is very worrying and why some scholars are predicting a new cold war.”

CHENG GONG, CHIEF RESEARCHER, ANBOUND CONSULTING, BEIJING:

“The impact of the China-U.S. trade dispute will be bigger on China due to the structure of its economy and the high reliance on exports. But it won’t be extremely large … there won’t be any panic or a big crisis in China.

“The chance that the issues giving rise to the trade war will be resolved in a short time is essentially zero. It’s not possible. The trade war will continue across different sectors and economic interactions.”

REAGAN LI, INVESTMENT MANAGER, V-INVESTMENT, SHANGHAI:

The trade dispute has “messed up corporate strategies, worsening already fragile fundamentals. Some stocks look cheap now, but could be even cheaper, when no one wants to buy them.”

“We can probably say that the trade war has officially started. I think this has less to do with trade and more to do with politics. Neither country is targeting goods that trade at the largest volume or goods that are most profitable. The U.S. is targeting the Chinese high-tech industry and the Chinese are targeting Trump voters. This is not a typical trade war.

“If this ends at $34 billion, it will have a marginal effect on both economies, but if it escalates to $500 billion like Trump said, then it’s going to have a big impact for both countries. In the short term, it will be mostly a psychological impact.”

“The escalation of tariffs can only have one positive outcome: to renew each side’s enthusiasm for negotiations. China and other U.S. trade partners are worried about American unilateralism, and the United States and other Chinese trade partners are deeply concerned about China’s regime for intellectual property.

“In terms of next steps, the tariffs on both sides should be dropped as part of a package deal, including the resumption of negotiations over a U.S.-China bilateral investment treaty, and a commitment by Washington and Beijing to advance non-optional WTO plus provisions in their preferential trade deals going forward.”

YUN XIONG, PARTNER, LEITON CAPITAL, SHANGHAI:

“I don’t think the market fully realizes the consequences. They think it’s priced in. But when they see trade data and FX reserve data in a couple of months, they will realize.”

SEAN CALLOW, SENIOR FOREX STRATEGIST, WESTPAC, SYDNEY:

“Markets have had plenty of time to price in these tariffs, and for every investor who is worried about where this trade battle is heading, there is another who points out that this stage of the trade measures is not likely to have a large impact on corporate profits or growth in either the U.S. or China.

“But it seems far too optimistic to simply brush aside this phase of U.S.-China tariffs. Trump’s 18 June statement threatening tariffs on up to $400 billion of additional China imports hangs over today’s fully anticipated actions. We should take this threat very seriously, given Trump’s long-standing views on trade, his protectionist promises on the campaign trail and polling indicating his voter base remains with him into the November mid-terms.”

KEN CHEUNG, SENIOR ASIAN FX STRATEGIST, MIZUHO BANK, HONG KONG:

“The market has already digested (the news of tariff implementation). Unless there is an escalation, the yuan is unlikely to have a sizable decline.”

XU YIYI, FUND MANAGER, HUAAN FUND CO, SHANGHAI:

“Cash is king and investors should stay on the sidelines watching. The impact from the first round of tariff levies is limited. But what about the second round, the third round, if Trump does what he said he would do?”

TOMMY XIE, ECONOMIST, OCBC BANK, SINGAPORE:

“I think probably China has no choice but going ahead with the retaliation package, but I doubt it will become full blown.

“It’s probably in Trump’s interest to drag the process to November, that’s why he can come out with any number he wants. I don’t know how he is going to do that. So I guess it is probably his strategy to ‘threat and drag’.

“The initial impact on China’s economy should be limited as $50 billion is not that much for the economy.”

“On the positive side, one could argue that China is a crucial supplier to the rest of the world of a lot of goods and so imposing tariffs on Chinese exports does not necessarily mean Chinese exports go to zero. Americans probably still would want their iPhones … and in some sense the increase in prices would be borne by the importer.

“The China-U.S. relationship is such a large component of global trade that we really have a global impact and that has implications that are difficult to foresee. There are all these feedback loops that have to be taken into account.

“China’s economy is actually relatively closed. It is a massive continental-sized economy nowadays. People seem to think it’s another one of the Asian tigers but it is a different beast, it has vast internal markets and vast savings like Europe, Japan and the United States.

“By and large I’m still fairly relaxed about this. It’s a drag on growth. I don’t think it’s as disruptive as often described. China’s position is strong enough to avoid a hard landing in the current scenario.”

BACKGROUND:

— U.S. President Donald Trump has threatened to impose tariffs on Chinese goods to combat what he says is Beijing’s misappropriation of U.S. technology through joint venture requirements and other policies, which China denies.

— Estimates from economists show that every $100 billion of imports affected by tariffs chip away around 0.5 percent of global trade, wiping off 0.1 percentage points of GDP growth.

— The direct impact on China’s economic growth in 2018 is estimated at 0.1-0.3 percentage points while the drag on its export growth is expected to be 1 percentage point. The effect on the United States will be less.

— Indirect damage is harder to assess, with global financial markets already skidding and collateral damage forecast for countries and companies which are heavily plugged into China’s supply chains.

— Morgan Stanley estimates that world trade could be seriously disrupted as two-thirds of goods traded are linked to global value chains.

— U.S. tariffs on Chinese exports will apply to engines and motors, construction and farming machinery, electrical, transportation and telecom equipment and precision instruments.

— Counter tariffs by China will hit U.S. agricultural commodities, autos and aquatic products. Soybeans are the country’s biggest import from the United States by value.

(Reporting by Reuters bureaus in BEIJING and elsewhere in Asia; Editing by Jacqueline Wong and Nick Zieminski)

Spartan Capital Securities

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